Like it or not, all streaks must come to an end. And projected
Q3 corporate earnings growth is expected to be -2.7% and barring
any major changes, that means the S&P 500's (^GSPC) incredible
streak of 11 consecutive quarters of earnings growth is over.
), FedEx (
), and McDonald's (
) along with others have issued warnings about future growth.
Yet over the past year, stocks have shrugged off growth concerns.
Is this time different? Has the Great Recession finally caught up
with the stock market? Can the market (once again) escape
Records are Made to be Broken
2012 has been a year of record corporate earnings. (We'll put that
record into context in a moment)
Today, forward Q4 earnings estimates for the S&P 500 is now
at a high of $112.26, surpassing the July 13th peak of $111.88, and
a new record high for the S&P 500 earnings estimate. (Source:
A few things the reader should keep in mind:
1) Regardless of how earnings turn out, the S&P's
(NYSEARCA:IVV) trend over the past 12 years is a compressing
P/E ratio. In fact, the current forward 12-month P/E ratio of
13 is still below its 10-year average!
2) Despite 20-30% growth off the 2009 bottom, the S&P hasn't
traded much over 15x earnings since then. (Even during the 2003-07
rally, the S&P multiple remained at 15x earnings or about even
with earnings growth.)
3) All major market tops coincided with record earnings. And the
chart below plots the S&P against earnings since 1998. A
picture is worth 1,000 words.
>> click here
to view larger chart
What about recent economic "improvements?"
More importantly, how does the U.S. economy now compare to
its 2007 highs - not the 2009 lows?
- The unemployment rate today is still 75% higher than it was in
- U.S. national debt has jumped 86% from $8.6 trillion in January
2007 to more than $16 trillion
- The U.S. post office defaulted on a $5.6 billion payment for
future retiree health care benefits
- 46 million Americans are on food stamps (up 170% since 2000)
The Moral of the Earnings Story
The world's central banks (in particular the Fed and ECB) have bid
up stock prices to near all-time highs. Yet, even without
the threat of sovereign debt defaults, stocks crumbled 50%+ from
their 2007 highs. Where will stocks end up this time? What happens
when countries start defaulting on their debt?
The bottom line is that the downside potential is now larger
than at any other time since the Great Depression. While the
long-term outlook is grim, it needs to be balanced with a
short-term positive bias of Presidential election years and the
Fed's monetary stimulus.
However, it is important to view the recent market action in
combination with technical indicators. The Fed has been able to
"fool" fundamental market forecasting, but not technical
indicators. One of those indicators is support/resistance levels.
And it's a fact that no rally starts without a break out above
resistance and no meltdown starts without a break down below
Profit Strategy Newsletter
identifies the key support level that needs to hold to prevent
stocks from dropping like a rock and the key resistance level that
- once broken - would foreshadow higher prices.
PS: Greece (NYSEARCA:GREK) is still on target for an official
debt default and the IMF threatened to stop its financing unless
the country's debt can be brought to sustainable levels.
Apparently, a debt-to-GDP ratio of 170% doesn't cut it.
Spain is next up and Spain's economy is 4.6x bigger than
Greece's. Italy's economy (another fiscal misfit) is 50%
bigger than Spain (NYSEARCA:EWP). Spain and Italy's
(NYSEARCA:EWI) combined economies are 11x bigger than
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